How We Think About Corrections

by | Apr 27, 2022 | General

Getting through to the other side of the valley

This is the third time in four years that the market has fallen this hard: the fall of 2018, the winter of 2020 and now this. Do those past corrections tell us anything about what to expect this time?

2020 was an outlier because of lockdowns, but the current market weakness is a lot like 2018. Company profits were rising, and there was fear about the Federal Reserve raising interest rates. Worrying about the Fed is reasonable—they have increased interest rates a number of times in the past, resulting in recessions.

But so far company profits are strong. As long as that remains the case the odds favor a correction and not a bear market.

It always comes down to the individual businesses investors own. Will our companies survive a recession? Will their sales and profits hold up? Do they have debt that could trigger a bankruptcy? Yes, yes, and no.

Companies with high levels of debt will fail as they always do when interest rates rise. And companies with flawed business plans will fail when the customers they believed were out there fail to show up.

So being fearful of the market while having confidence in the individual businesses we own is a normal part of stock investing. Allowing the market to spook us into selling great businesses is the difference between mediocre long-term results and above average results.

Corrections are the emotional price we pay for being passive investors. Most of the time we can sit back and watch the employees of our portfolio companies produce wonderful outcomes for our portfolios. Then there are times like these when the bill comes due.

Best regards,

Daniel A. Ogden

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